Swati Kulkarni, Executive Vice President and Fund Manager, UTI Mutual Fund says the market has already factored in a 25 basis points (bps), so the Nifty may not react far too much to it.
Speaking to CNBC-TV18, Kulkarni says the central bank has a good case for cutting rates owing to strong inflation data.
Meanwhile, she recommends investors to bet on cement, auto, auto ancillaries. However, she suggests a strong avoid call on metals, despite their decent valuations.
Below is the transcript of Swati Kulkarni’s interview with Ekta Batra & Anuj Singhal.
Anuj: Tomorrow is the Reserve Bank of India (RBI) monetary policy, how big you think that is going to be a trigger for the market and Do you think there is a risk of the markets selling off again like we saw with last rate cut or do you think this time it would be different?
A: It is highly probable that 25 basis point rate cut is likely to happen. Of course nobody can predict what RBI finally does to the 100 percent perfection but market is factoring in about 25 basis point rate cut at this point of time.
Ekta: According to you will the banks pass on additional lending rate cuts, the big ones such as State Bank of India (SBI) and if so by how much? Where do you expect may be lending rates to be by the year end?
A: The stalwart, bankers have already commented on this and we have some anecdotal evidence of HDFC Bank taking a rate cut and also SBI has also followed so, from that perspective the transmission has started to happen. There is definitely a room for a rate cut given the Fed in action in this last policy and also given the inflation numbers which recently were announced at 3.66 percent. So, I think there is a fair amount of ground to expect a rate cut at this point of time.
Anuj: Once this policy is out of the wave what do you think is the next trigger for this market? We have been in a bit of a near-term bearish trend or if you want to call may be a bull market correction but the market has really tested patients of the bulls over the last many months. Do you think we will stick in this range and do you think we have made a bit of high at around 9,000 and would it be tough for the market to go to 9,000 or do you think in next 6 to 12 months the market may go to all time highs?
A: The trigger for that kind of movement from the market is earnings recovery. While we know that the economy is in up cycle and as far as the cyclical recovery is concerned. We don’t know the pace and we don’t know exactly how the investment side of the economy is going to pick-up.
As you know unless the investment side of economy shows some traction it is very difficult to assume that the consumption side of the economy is going to support all along. So from that perspective I think earnings recovery is going to get triggered and that we know is going to be the second half. We have to be patient to look at how the contracting activity, the mining that is expected to pick-up and also the announcement on the roads and railways that actually streamlines the economic mobilisation and that is something which is expected in the second half and also we have a favourable base as far as the FY15 muted earnings was concerned. So, I clearly think that probably earnings recovery is what the market will look for and that is what will drive the market further.
Ekta: What is your sense in a couple of these pharmaceutical stocks? Has the cream come back in terms of valuations only in the selective pharmaceutical stocks say something like a Dr Reddys Laboratories versus a Sun Pharmaceutical Industries and hence going forward we are not going to see a generic sort of valuation parameter for pharma stocks? It might be more stories specific?
A: I can’t comment on stock specific, but definitely pharma is a sector where some companies do tend to gain depending on their abbreviated new drug application (ANDA) pipeline and the approvals. They tend to make extraordinary profits during when they have exclusive rights. So, from that perspective there would be a much of a stock specific moves that we will have to get into the nitty-gritty.
However, generally I would like to mention that given the expectation that the dollar is likely to remain firm and these companies do have exposure to US markets and hence this sector as a whole especially the companies which have US generics as a large portion of their revenues, these are likely to remain under investment radars. That is what is going to drive and of course there will be case specific outperformance within that sector.
Anuj: Going forward which are the sectors you are most bullish on after the kind of correction that we have seen?
A: Strategic portfolio construct remains the same. Basically we would like to have more allocations towards the cyclical stocks. So, from that perspective I continue to stay overweight on stocks like cement, automobile, auto ancillaries and industrial manufacturing construction. On the banking side we will be bridging our underweight positions so more or less that remains the same.
At this point of time we are still avoiding sectors like metal, though the valuations are very attractive there. So, may be at five to six time enterprise value (EV)/ earnings before interest, tax, depreciation and amortization (EBITDA). However, given the slowdown that is talked about in China; China export is a big threat for the sector as far as the pricing power is concerned. Given the global slowdown I don’t think China demand can be replaced by any other nations quickly. So from that perspective I expect the pain to continue in that sector and hence I would rather avoid that sector and also will avoid realty at this point of time.
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